Emerging markets equities are performing well this and Latin American stocks are a big reason why. The iShares Latin America 40 ETF (NYSEArca: ILF) is up 15.4% year-to-date, outpacing the MSCI Emerging Markets Index by 270 basis points.
Not surprisingly, Brazil and Mexico, Latin America’s two largest economies, are driving the region’s equity markets higher. The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian equities, is up 11% this year and with Latin America’s largest economy sporting improving fundamentals, there could be more upside to come for Brazilian equities.
“Fitch Ratings forecasts regional GDP growth to recover moderately to 1.3% in 2017 following two years of economic contraction. Better external demand, a moderate rise in commodity prices, and improved performance in two large regional economies (Argentina and Brazil) should facilitate the region’s economic recovery,” said Fitch Ratings in a recent note.
The iShares MSCI Mexico Capped ETF (NYSEArca: EWW) is up 15.4% this year. With the peso also sliding in the wake of Trump’s win, the Mexico’s central bank could move forward with more rate hikes to stem the currency’s slide. Although Mexico’s central bank said the first rate hike earlier this year was not the start of a new tightening cycle, the central bank surprised global investors last month when it boosted borrowing costs by 50 basis points to 4.75%, which is good for the country’s highest interest rate since 2009.
The peso is an important part of the Mexico investment thesis because exports account for over a third of GDP in Latin America’s second-largest economy. So are oil prices because Mexico is one of the largest non-OPEC producers in Latin America.
“Several inflation-targeting central banks have begun to ease monetary policy (most notably Brazil) as the pass-through from weaker currencies is waning and the impact of the El Nino weather pattern is diminishing. Conversely, Mexico has been tightening monetary policy to control inflation and inflation expectations in the face of a weak and volatile peso. Fiscal consolidation continues to face challenges from weak growth and continued spending pressures, while debt dynamics remain adverse in numerous countries,” according to Fitch.
Some investors are reevaluating Brazilian stocks, something that has benchmark indexes there trading at the highest multiples in a decade. However, Brazilian assets can be more appealing with the help of a weaker dollar and stronger commodities prices. The Brazilian real has been one of the better-performing emerging markets currencies this year.
For more information on the Mexican markets, visit our Mexico category.